Thrilling Thursday Morning

We had a very hard time not panicking yesterday.

Panic is easy, sticking to your plan is very, very hard.  We made few moves during the day, sticking to the Tuesday Wrap-Up plan to grap the DIA puts and let those gains offset our losses.  The $113 puts opened nice and low at $1.10 and finished the day at $2.50, where we turned around and sold them against our longer puts.  So we ended the day not exactly bullish but not too upset either as we held about half the gains we made on Tuesday, despite the terrible market action.  I concluded that there was a change in long-term sentiment and, in last night's Wrap-Up, I went over the macro view of where we are in our crisis cycle.

Asia didn't panic this morning as both the Hang Seng and the Nikkei managed to hold flat for the day at 21,821 and 13,067 respectively.  China's rapidly slowing export growth has currency traders guessing that the government will curb Yuan appreciation, which is good for the dollar.  The Shanghai Composite pulled back 1.5% after a nice couple of gains but the rest of Asia was flat, flat flat despite the very scary US drop.

Financial stocks and steel stocks did very well and I find the steel stocks strange as clearly the China building boom is losing steam and TM just announced more SUV and truck production cutbacks and I'm pretty sure those are the two things steel is generally used for.  Yesterday in comments I said about SNE "they are building up their OLED screen capacity which will wipe out LCDs sometime next decade…" and, this seems to have prompted the Japanese government to take action (they are subscribers) as they formally annouced this morning that they are "working with Sony Corp., Sharp Corp. and other electronics manufacturers to jointly develop a promising next-generation television technology, in the latest effort to retain the competitiveness of Japan's electronics manufacturers."  Original members will remember that we were big fans of OLED pioneer Cambridge Displays before they got bought out by Japan's Sumitomo Chemicals.

Over in Europe, the BOE is holding rates steady at 5% despite the slowing economy, which is GOOD economic policy as throwing money at a problem that is rooted in inflation is just plain stupid!  The London FTSE actually responded well to the Bank's vigilance and the DAX perked right up as well with both trading down about 1% on the day (8am) but well off the lows.  Banks and retailers are weak in Europe as the EU looks to increase capital requirements on certain credit products.

The BIG news in the US markets is DOW's $15.3Bn deal to buy ROH, a 74% premium on yesterday's $44.83 close!  This only caused the $32Bn chemical makedr to fall about 5% pre-market indicating that investors may think things are ridiculously undervalued as well and, if DOW holds up in today's trading, this may finally be a sign that it's safe to get back in the water on the M&A train, which has been parked at the station since early last year.

Retail sales were stimulated last month so it's hard to call a trend but WMT had a 5.8% increase in same-store sales over last year, much better than expected.  The company remains conservative but does forecast a 2% growth rate for July as well.  COST had an even better 9% gain but they attribute 4% of that to gasoline sales.  Overseas, where there are no stimulus checks, COST reported an excellent 11% increase.  I keep waiting for COST to come down but it never does, they are a great operation!  BJ jumped 16.5% and said half of that was gasoline sales – lots of summer fun!

Oil did just what we expected it to yesterday as the "surprising" draw of 5M barrels surprised no one at PSW as it's exact number we predicted 3 weeks ago when they closed NYMEX trading 20M barrels short for July (evidenced by the drop in imports already of 621,000 barrels a day below last month).  It was actually worse than it seems for the oil bulls as the refiners got stuck with almost 3Mb of distillates as they overproduced for the low-demand weekend.  Don't expect oil to come off the floor today and, as long as they stay under $137.50 for the week, we're happy…

Another strange thing you will notice looking at that oil inventory link – The US is EXPORTING 1.44Mb PER DAY of petroleum products.  That means we are ordering 10Mb PER WEEK, which adds to our "consumption" refining it (I thought we had a shortage of refineries) and then sending 10Mb PER WEEK out of the country so it doesn't show up in inventories.  So it appears that we are using 10Mb more per week than we really are as refiners flip the product over to other countries while oil bulls point to "evidence" of a shortage of product here in the states.  Nice scam!

Gasoline use is now at a 5-year low after spending a month over $4 and we are now down over 5% from last spring's usage levels.  "We think oil is set for a significant correction," says Michael Waldron, an energy research analyst at Lehman Brothers. "But it's probably not going to occur until the end of this year or the beginning of next year."

As evidenced by yesterday's intra-day action, we need oil to go MUCH lower before the markets can get it in gear so we will remain very well covered and very, very careful until we get some resolution to this latest round of bank hysteria and some meaningful relief at the pump.